Ask any business student what the secret to commercial success is and they’ll tell you it’s profit margin, not just sales volume. Therefore, to be good at selling things you have to excel at buying them. Usually, companies have a strong incentive to tightly manage what’s called ‘direct supplies.’ These are the raw materials and goods essential for the manufacture or delivery of their own products or services. The cheaper their direct supplies the better their margin.
But equally important to the effective management of margin are the expenditures related to the purchase of services and goods that keep their day-to-day business alive. Known as ‘indirect supplies,’ these have traditionally been much more difficult to control. This situation changed with the introduction of specialized procurement software that aids the control of indirect supplies and associated spending. Brokers in the information flow between suppliers and buyers, known as procurement software vendors, are removing the friction and chaos that had so long characterized corporate procurement.
Rockstar, Procurement Superstar!
Two weeks ago, I attended SAP Ariba LIVE, and this month I had the privilege of being part of a panel at Coupa Inspire. Both events are run by leading software companies in the procurement space, and both were big. So big in fact that the navigationally challenged, myself included, could have permanently got lost in the exhibition, its breakout sessions or onward social events. Any outside observer would have been excused for marveling at the fact that a procurement software vendor, that assists companies in the relatively mundane task of buying and selling, could ever take-over some of the world’s biggest and most prestigious conference centers. But, make no mistake – procurement is a goldmine; and their CEOs are quickly acquiring near rock star statuses.
The modern brokerage function for business-to-business transactions makes procurement platforms the perfect candidate for cloud-based deployment models. And multi-national organizations have adopted these cloud services with the explicit aim of imposing a single method for buying indirect supplies across their global network of subsidiaries. As a result, many procurement vendors are rapidly building ‘business networks;’ enormous global business-to-business marketplaces where everyone can sell to, and buy from everyone, regardless of geographic borders. This inherent trait of procurement platforms – coupled with similar features in the world of e-commerce – is contributing to a growing sense of unease among governments who are fighting hard to maintain their countries’ borders.
Taxation vs Globalization
The accelerating globalization of production, distribution, and consumption is driving tax administrations to take countermeasures that aim to guarantee the effective collection of tax. But there is no denying that tax administrations have in the past been slow and archaic in responding to globalization. Initially, they simply prohibited the use of electronic media for key transaction documents such as invoices. Then, around the turn of the millennium, some tax administrations started experimenting with imposing authentication techniques, such as digital signatures, to ensure that electronic invoices would be as auditable as their paper equivalents.
The Latin American Tax Revolution
About a decade ago, something remarkable happened. Countries in Latin America, who had a strong incentive to reduce the VAT gap, began re-engineering the way tax was controlled through audited business transactions. And the incentive to do so was massive. VAT ‘gaps’ in Latin America at the time were huge. This was in part due to the large gray economies, which in their paper-based worlds they were not equipped to confront. The opportunity to impose real-time auditing of tax arose out of a combination of a less consultative method of policy-making and the reduced administrative structure within their tax administrations. The factors gave rise to the countries of Latin America inventing the concept of real-time tax control. Instead of the flawed method of a retrospective audit by a tax administration, they designed systems where business transactions could be reviewed and controlled as they happened. The internet and all its associated technology were central to this revolution.
A Global Tax Revolution?
Because of the demonstrated effectiveness for improving tax collection in Latin America, real-time control systems are now increasing in prominence across the globe. Experts, myself included, are now predicting that most countries with a significant reliance on VAT will migrate to some form of real-time or near-real-time transaction control system in the next decade. As this transition happens, the world of business will be thrown into a nearly unprecedented level of VAT compliance chaos.
Across the world, tax administrations are investing large amounts of money into technology platforms that businesses must meet the specifications of and connect with. And tax administrations aren’t shy at adjusting the specifications, with very little lead time to ensure they have effective control. Business processes and IT systems around the world are coming under impossible amounts of pressure to deal with these constant multi-layered changes and aggressive time frames. Globally, businesses no longer own the innovation agenda. All their resources are being spent to keep up with the avalanche of diverse technological requirements that stem from the innovation driven by tax administrations.
This revolution is transforming the world of procurement, and it’s doing it in a way that is more granular and fundamental than anyone could have predicted. Think of it this way, the central paradigm of a procurement system is that there are two parties to each transaction, a supplier, and a buyer. Schematically, with the emergence of real-time tax controls, data flows have to be orchestrated around the needs of three parties: the supplier, the buyer and the tax administration itself. The complexity behind this fundamental shift is staggering.
The Burden of Change
Procurement platform providers are going to carry a larger share of this burden than many other types of business-to-business transaction automation vendors. This increased burden falls on them as many of the core business processes, of both the supplier and the buyer, happen on their platform. What this means is invoice data is often generated on the procurement platform, and the trading partners’ ERP systems often just act as a passive system of record. When the procurement platform hosts the entire end-to-end transaction for both parties, most tax administrations will expect that the real-time business transaction controls will be managed by the procurement provider. That’s good news for businesses, who are off the hook for managing these areas of compliance themselves, but a task of epic proportions for procurement vendors.
The economics that will govern the emerging three-way procurement interaction could not be clearer: since the processes and technologies required for integrating with tax automation platforms are imposed by law, there are no shortcuts. As a result, tax requirements will inevitably impact how procurement systems manage the integration between supplier and buyer, both in terms of data formats, authentication and signing methods, and ultimately the actual underlying business processes themselves.
To understand what this means in real life, let’s look at the rough numbers:
- There will be hundreds of different real-time control jurisdictions
- Each jurisdiction will force businesses to adopt different data formats, authentication, signatures, and business processes.
- Each procurement ‘business network’ will host anything from a few hundred to hundreds of thousands of companies operating complex business processes.
Making things significantly worse, legal and business standards have very different evolutionary rhythms. Designing and maintaining the millions of permutations that result from this equation will be a Herculean task that no vendor, no matter how big, can manage alone; something must give.
Guaranteed Compliance Amidst Global Tax Chaos
As always, when faced with a set of systems that harbor such high levels of complexity, the answer lies in decoupling and specialization. Procurement and business network vendors need all their energy to further optimize business spend management, without the distraction created by the chaotic world of tax. If we want business networks to grow and companies to benefit from frictionless global commerce, procurement vendors will have to design their systems to decouple business from tax compliance functionality. The world’s leading vendors in this space have pursued this design philosophy for a number of years. However, there has not been a single vendor they can turn to for comprehensive, cost-effective outsourcing of tax compliance and associated change management. The world of tax compliance technology has until now been fragmented with vendor silos for tax determination, reporting, e-invoicing, legal archiving and the other necessary services that allow businesses to ensure compliance.
The acquisition of TrustWeaver by Sovos changes that. For the first time, procurement and other business automation vendors can look to a single provider for a full suite of tax compliance services. The quality, security and cost benefits of sourcing tax compliance from a single vendor will also give businesses the confidence they need to increase the volume of transactions they place through these vendors. This growth in networked business transactions will accelerate the adoption of best practice based business process automation and contribute to the elimination of environmentally harmful paper-based transactions for companies across the globe.
Learn how Sovos Use Tax Manager can safeguard your business against the burden and risks of procure-to-pay sales and use tax compliance, give your tax team the visibility and control needed over tax data on every purchase – without slowing down your Accounts Payable process.
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